Vince Cable's plan B: a "matter of judgement"

Business Secretary Vince Cable Vince Cable: "A careful and well-argued essay" for the New Statesman

Should the British government try to boost growth with higher public investment - even if it means higher borrowing?

Quite a lot of economists in the City, in economic think tanks, and in institutions such as the IMF have been pondering that question for some time.

Most of those economists, like Vince Cable, tend to think it's a matter of judgement whether it would do more good for the economy than harm.

I would say most would also agree with Mr Cable that the arguments in favour of investing and borrowing more have grown significantly over the past 18 months.

But, none of these economic ponderers are the business secretary - in a government which even today insisted that the coalition needed to hold the line on borrowing.

That makes his comments significant, as Mr Cable himself knows very well.

Even if his careful and well-argued essay for this week's New Statesman ultimately declines to come down firmly on the side of higher borrowing.


The politics of his remarks is something for others to consider - including, clearly, the business secretary himself. What about the economics?

Readers of this blog will be familiar with the arguments for higher public investment, which are essentially the other side of the most common criticism of the coalition's strategy from economists, that it cut public investment too dramatically in the first two years.

As Mr Cable says in his article: "Without doubt this is the least efficient form of fiscal tightening.

"It can inflict more damage on output than cuts in current spending or tax increases because the multipliers are much higher." (Remember, if the multiplier is high, that means a given amount of tightening has a larger effect on growth than other equivalent cuts, or tax rises.)

The strongest argument in favour of higher public investment, right now - voiced by the IMF and others - is that it could have a greater effect on growth than anything else the government might do on the spending side, and might even pay for itself.

The strongest arguments against have tended to be: a) that this investment can't actually be made to happen quickly enough to make a significant difference to growth in the next year or so; and b) that the higher borrowing might derail the government's deficit plans, and dent its market credibility.


What's interesting about Mr Cable's essay is that he vigorously disputes both of these arguments against higher investment.

Start Quote

If raising public investment increases the government's assets, it's even possible that it could lower net debt - ie cut the numerator - as well as increasing GDP”

End Quote

Treasury officials have long argued that there aren't enough "shovel-ready" investment projects out there. After all, the government is struggling to push through even the investment increase it has already committed to.

This is Mr Cable's response to HMT: "Pessimists say that the central government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn higher than last year.

"Businesses are forward-thinking and react to a future pipe-line of activity, regardless of how 'shovel ready' it may be: we have seen that in energy investment, where the major firms need certainty over decades."

Second, on the impact of higher borrowing on the deficit strategy, and confidence, he has this to say: "Such a strategy does not undermine the central objective of reducing the structural deficit, and may assist it by reviving growth.

"It may complicate the secondary objective of reducing government debt relative to GDP because it entails more state borrowing; but in a weak economy, more public investment increases the numerator and the denominator."

Lower debt?

These are arguments which many economists would accept. It is also worth noting that the government has already broken that secondary rule of cutting government debt relative to GDP in 2015. In that sense, the damage is already done.

Also (though Mr Cable does not make this very nerdy point), it's worth remembering that the government measure - net debt - is what you get when you subtract the government's assets from its gross liabilities (debt).

If raising public investment increases the government's assets, it's even possible that it could lower net debt - ie cut the numerator - as well as increasing GDP. (I said it was nerdy).

The bigger point that Mr Cable is making here is that Mr Osborne has defined his strategy in terms of the current, structural deficit: that is, borrowing that is not due simply to the weak state of the economy and that is NOT used for public investment.

So, it would not be affected by higher public investment.

But, even if it is not included in the target measure, higher borrowing is higher borrowing, which will somehow have to be paid for.

Mr Osborne's advisers would say any increase in investment that is large enough to have a material effect on the recovery would set off alarm bells in the markets, even if the formal deficit plan had not been undermined.

A good number of City economists would agree.

That, as Mr Cable says, is indeed a matter of judgement. But in the course of 3,800 words he doesn't leave a lot of doubt as to what his private judgement would be.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

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  • rate this

    Comment number 68.

    Cameron and Osborne won't jump.Time for Cable and Libdems to give them a push?

  • rate this

    Comment number 67.

    #57 That is what "Green Deal" is but they want to charge 7% & 8% for borrowing money, cloud cuckoo land, that is why nobody wants to borrow it.

  • rate this

    Comment number 66.

    Stephanie-the reasons you cite for not increasing investment spending are political rather than economic
    it seems blagging a win at the next election is more important than resolving the UK's issues

    investment can't happen quickly enough to make a significant difference to growth *in the next year or so*

    higher borrowing might derail the government's deficit plans, and
    *dent market credibility*

  • rate this

    Comment number 65.

    The denominator (GDP) does not measure "profit" it measures spending and investment, so profitability isn't necessary.

  • rate this

    Comment number 64.

    SRB - correct, hence i said when it makes investment sense - ie if projects are economically profitable.

  • rate this

    Comment number 63.

    sucsesive goverments have caused all this mess,arfterall what do our leaders know about life and the answer is none,i believ that any goverment who chooses to buy from abroad what can be sourced in the uk is a traitor to our realm and should be dealt with and to hell with the EU ,off with there heads or the stake atleast the star act would appear on time and what an audience!

  • rate this

    Comment number 62.

    Unbelievable! We really do have the lunatics in charge of the assylum.Cameroon and osborne burying their heads in the sand hoping the debt will go away and then Cable saying borrow more! Thats why the uk is totally bankrupt and there is & will be NO growth until `the elephant in the room` is confronted,first though it has to be acknwoledged.At present all poloticians are in denial.

  • rate this

    Comment number 61.

    “More public investment increases the numerator and the denominator."

    Yes. But unless the investment is profitable the numerator will stay higher for longer than the denominator.

  • rate this

    Comment number 60.

    'But, even if it is not included in the target measure, higher borrowing is higher borrowing, which will somehow have to be paid for'.
    But, as you said (Cable also) higher public inv may lead to less net debt. When it makes investment sense, with the strong multipier effects, higher public investment should be encouraged.

  • rate this

    Comment number 59.

    Visited new housing estate last weekend.
    Houses so expensive!
    Devious Developers up to old tricks of selling monstrous mortgages on tiny tiny boxes.
    But there were 'affordable' homes, but buyers were means tested.
    just sell all houses at the (lower) market value.
    Very few were sold, yet another unfinished estate.
    Sort this out Vince before you waste any more money on banks or public spending

  • rate this

    Comment number 58.

    @54. springheeledjaks
    Right about council houses, wrong about right to buy.
    Right to build nuclear - but use British designs and British builders and do it after renationlising all power companies.
    Flat benefit will also push unemployed from areas where the employed can't afford to live, cutting pollution, stress, cost and road demand.

  • rate this

    Comment number 57.

    Government Ten Year Bonds. 1.8,-1.9,-2%

    Why does the government lend money at that rate to individuals who wish to spend on "inferstructure" ie. Triple Glassing, Solar energy. Heat pumps, Energy Recovery, Private House Building,

    It seems to work well in Germany.

  • rate this

    Comment number 56.

    S.F. "If raising public investment increases the government's assets, it's even possible that it could lower net debt - ie. cut the numerator - as well as increasing GDP".

    So we can borrow enough to get completely out of debt. AND Create a boom economy!!!!

    Don't tell the Politicians, or that just might become Plan B

  • rate this

    Comment number 55.

    @18 ianmckennish
    'The identification of potential capital projects needs care, and the current political climate doesn't really encourage that.'

    too right

    central govt is in a hopeless place (nod to Rhianna)
    there is a desperate need for care for the elderly, hospice care, respite care, sheltered homes. The NHS could function if this were available.
    Fund it locally per capita, cut out London.

  • rate this

    Comment number 54.

    Build good modern council houses now. Give tenants the right to buy in 10 years time (at replacement cost.) Build modern modular nuclear plants like the Hitachi ones which are built from the outset to be upgradable/decomissionable. Energy self sufficiency is essential, we should view it as a national priority.

  • rate this

    Comment number 53.

    They don't need to borrow to do so.
    Just buy British. Ensure anything you buy - from IT services to army uniforms is made in Britain by British workers.
    The latest IT mess up uses a bunch of expensive consultancies who ALL employ overseas labour. The army marches in Chinese uniforms waving Austrian guns!
    All this means money LEAVING the UK - money we've borrowed. Read Keynes the answer is there!

  • rate this

    Comment number 52.

    Push some money into local councils, construction based projects..

    Confidence will rise..above all, give the banks an almighty boot up the backside and get them lending, this will allow business to restart in investment projects, releasing the money they`re holding onto..

    Borrowing to finance this.? my mind cancel Trident, it`s a vanity possesion..

  • rate this

    Comment number 51.

    Nice to finally see a member of the Government giving this issue some serious and informed reasoning as to how tackle the failing economy.

    Unfortunately Cameron and Osbourne, I fear, will take absolutely no notice and continue with their head in the sand believing in there carry on regardless and things are getting better rhetoric.

    A small voice of reason shouted down by blinkered ideology.

  • rate this

    Comment number 50.

    Dave says there is no "magic money tree" which can be used to promote growth. Hmm but wouldn't that be the same tree from where the £375 Billion (so far..) of Quantitative Easing so conveniently and magically came from?

    Funny how the funny money is there for the banks who caused the mess but not there to build infrastructure and housing that might just help to improve the economy and lives

  • rate this

    Comment number 49.

    The simple truth is that essentially the UK is a business that at the moment is being run like a clueless rich boy's plaything, no change will happen for the better until the country is run properly as a business by people who are very well educated in business & proven in the past running of a successful & viable business, all the stupid ego boosting ideologies & one upmanship must be ended now!


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